Thursday, 19 March 2009

Fundamental Analyst Moves to Wordpress

Hi all, I finally forked out and got my own domain and hosting service. Thus I have relocated this blog to Wordpress. Below is a screen shot of the new site, please click here to go directly to

I've slacked off on the posting in recent months as I tried to learn more about building websites. After building half a site I realized that I didn't need an entire site with multiple pages, just a more flexible and attractive (hopefully) blog and an idea about how to draw more visitors to get more discussion going in the comments.

Anyway, please take a visit and let me know what you think. All prior posts and comments have been copied over to the new blog. Put comments on the new blog if possible but if not here is fine. Comments, criticism, praise, nude pictures (women only) are all welcome.

Wednesday, 18 March 2009

The Age of Hubris Comes to a Head

Despite collapsing earnings, shattered stock prices, ousted CEO’s, bankruptcies and quasi bankruptcies in the case of Citigroup, Bank of America and AIG, the hubris and arrogance of former financial masters of the universe continues.

As if Merrill Lynch rushing through bonuses before announcing massive losses was not enough, AIG has just upped the ante in the sheer arrogance stakes by taking US taxpayer money and paying bonuses to the very people who blew the place up. Not only that, it seems that some so-called retention bonuses are being paid to employees that are being dismissed, from the NYT:

Mr. Cuomo did not name the bonus recipients, but the numbers are eye-popping, given A.I.G.’s fragile state. The highest bonus was $6.4 million, and six other employees received more than $4 million, according to Mr. Cuomo. Fifteen other people received bonuses of more than $2 million, and 51 people received bonuses of $1 million to $2 million, Mr. Cuomo said. Eleven of those who received “retention” bonuses of $1 million or more are no longer working at A.I.G., including one who received $4.6 million, he said.

How’s that for hubris? Retention bonuses for people who weren’t retained. There goes the argument that you need to pay people bonuses to keep them. However it appears that AIG may have gone too far with this latest tactic. Outrage is being expressed by every politician up to and including the President. Public outrage is reaching a crescendo and to make matters worse, every time AIG makes a statement they just incite more loathing.

Take for example the latest justification for paying derivatives traders bonuses. “It’s in their contracts and the contracts cannot be reneged upon”, “if the American government starts interfering with contracts and changing the rule of law, the U.S. will be no better than a banana republic.” But hold on, isn’t the US government, aka U.S taxpayers, the majority shareholder?

Consider what would have happened if the government had not bailed out AIG . They would have gone into bankruptcy and then all contracts could be legally modified or completely voided. But for some reason we must obey the rule of law because the company whilst for all intents and purposes is insolvent, is not officially in the hands of receivers. Was it not Adam Smith who opined that an economic system that is allowed to operate without a moral foundation would soon lead to an amoral, if not immoral, society?

But why so much outrage over $165 million in bonus payments when we also now know that approximately $49.5 billion of taxpayer money was used to make counter-parties whole to CDS contracts written by AIG? From the

AIG paid out $22.4bn of collateral related to credit default swaps, $27.1bn to help cancel swaps and another $43.7bn to satisfy the obligations of its securities lending operation. The payments were made between September 16 and the end of last year.

Goldman Sachs, which has also accepted US government support, received payments worth $12.9bn. Three European banks – France’s Société Générale, Germany’s Deutsche Bank and the UK’s Barclays – were paid the next-largest amounts. SocGen received $11.9bn; Deutsche $11.8bn; and Barclays $7.9bn.

Can anyone really register surprise that Henry Goldman Paulson was in charge as Goldman Sachs became the biggest beneficiary of public funds injected into AIG? Tim Geithner is not without blood on his hands in all this either and if the policy of privatizing the profits and socializing the losses is to change, Geithner needs to go, simple as that.

Scandals such as Enron and Worldcom pale in comparison to the magnitude of what is currently unfolding. Whilst it is now obvious to all and sundry that the global financial complex grew too large and powerful, it is not yet obvious the extent to which public outrage will compel lawmakers to act.

It is no longer useful to talk about lack of transparency or poor risk management. From Countrywide to Bear Stearns, Lehman, Merrill Lynch, Citigroup, Fannie and Freddie and AIG there has been lies, obfuscation and outright fraud. The age of hubris cannot come to a close until the executives of financial institutions are held accountable for their actions. It remains to be seen whether the level of public outrage is sufficient and the political will exists to make that happen.

Tuesday, 17 March 2009

Toughest Times Ahead Says CBA's Norris

Addressing the American Chamber of Commerce in a function today, CBA's Chief Executive Floyd Norris has this to say:

"There's no doubt that the toughest period in the Australian economy still lies ahead of us," Mr Norris told an American Chamber of Commerce in Australia function on Tuesday.

Norris also went on to say that he couldn't rule out a cut in the final dividend for this year. after ANZ and more recently NAB have said they will cut dividends by about 25%.

Amongst other things, Norris said that funding costs remain high and thus further interest rate cuts could not be guaranteed to be fully passed on to customers. In addition CBA was seeing a uptick in delinquent loans but that it was not yet significant.

There's not much in Norris' comments that should be surprising to anyone with their finger on the pulse. Rudd's handout programs will do little more than cushion a deteriorating economy. As the government digests that reality in the second half of this calendar year, the will be calls for Rudd stimulus mark before the year is out.

Also out today, the RBA released the minutes of their March meeting laying out their reasons for leaving interest rates unchanged. As usual I don't recommend you read the minutes unless you want to go to sleep so here is crux of it.

The question for policy was whether further stimulus should be added at this meeting, or whether, having reduced rates at each meeting since September, the Board should pause for a further evaluation of the situation. Members could see reasonable cases for both courses of action.

On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings.

Clearly the RBA is leaving the door open, my expectation continues to be that the RBA will cut to at least 2% before we reach a cycle trough. The one bright spot the RBA mentioned and which has been reinforced by the data in recent months is housing activity, especially in the First Home Buyers segment.

In recent months there has been a bump in the dollar amount of lending finance for new and established dwellings whilst finance for investment properties has fallen back to levels last seen in November 2002. The RBA commented that:

In a sign of increased demand for housing, patterns of housing finance indicated an increase in housing loan approvals of about 10 per cent over the past few months, partly spurred by the increased incentives for first home buyers to enter the market. However, credit growth had remained low as borrowers had evidently taken advantage of the extra cash flows created by lower lending interest rates to increase debt repayments.

Further signs of an increased level of activity in the secondary housing market were significant rises in auction clearance rates in both Sydney and Melbourne in February, and a component of the Westpac-Melbourne Institute consumer sentiment survey indicated that current conditions were conducive to buying a dwelling.

Increasingly we hear calls from those in the real estate industry that home buyers should get in now while interest rates are near historic lows, clearly some are listening to that call. However I can't help think that some buyers are being sold a lemon.

I continue to believe that the housing industry is only being propped up by the FHB grant and handouts from the Rudd the redistributor. It will be interesting to see if the increase in the FHB grant is extended beyond June and to what extent the Housing market can continue to hold up. I get the feeling there will be more than a few cases of buyers remorse in the next 12 months or so.

Saturday, 14 March 2009

Major US Banks Are Profitable....... Oh Puhlease!

Putting aside the media's facile obsession with explaining every tick of the tape with an event, lest''s examine the supposed reason for the beginning of this rally. The idea that Citi was profitable in the first two months of 2009.

The argument goes that writeoffs are non-cash and therefore don't affect cashflow or profitability. That's great if you ignore the balance sheet. Remember write-offs are euphemisms for mistakes and in this case it is the reversal of falsely booked profits in prior years.

Write-offs are taken through the P&L and then written off against equity in the balance sheet and if a company has no equity it's out of business, especially if it is a bank that has to maintain a certain level of equity. Where would Citi be if it didn't get $45 billion of equity injections and $300 billion of assets guaranteed by the government.

As for excluding credit losses that argument is even more ridiculous, a bank is in the business of extending credit and thus credit losses are part of the business, how can you possibly exclude them? That's like saying GM is profitable if you exclude what it costs to make cars.

Anyway Krudlow the Clown and his clueless minions Jerry the echo Bowyer and Dick Bove bought into the whole scenario. Luckily Joe B was there to tell them what morons they are. Remember that Dick Bove was the same guy that said a year ago to buy Citigroup at $30, that they didn't need to cut their dividend and that the credit crunch was over! This guy is a bank analyst and yet he clearly doesn't know how banks work. Watch this incredible display below:

Market Rally Continues
Market Rally Continues

ps. I said something else in that post a year ago and that is that I watch too much CNBC, some habits are hard to break.

Cramer vs Stewart Showdown

The much awaited showdown between Jim Cramer and Jon Stewart aired on the Daily show on Thursday night. I thought that Jon Stewart might make it lighthearted and go easy on Cramer but thankfully he did not. In fact quite the opposite.

I think it is fair to say that there has been a growing divide between main street and Wall Street. There is a growing revulsion for those that made millions, walked away when the music stopped and left the taxpayer on the hook. Jon Stewart hit that chord beautifully on Thursday night.

The only thing I will say is that was disappointing is that not more light was made of the lack of accountability of more of the hosts. For example that complete and utter moron Dennis Kneale, who should be gagged and thrown in the East River, Michelle Caruso Cabrerra who like Kneale has an opinion on everything and knows nothing but most importantly Larry Kudlow, or is that Kuntlow?

Not only is Krudlow the Clown a right wing nutjob but he has been completely and utterly wrong on everything for the last 2 years. 18 months ago Krudlow would arrogantly deride anyone with a bearish opinion backed up by his trio of idiots, Don Luskin, Brian Wesbury and Jerry Bowyer all who have been completely discredited but who interestingly continue to get invited back on the show whilst people like Mike Panzner and Barry Ritholtz who got it right, haven't been seen for the best part of a year. Anyway that's my rant over, enjoy the videos.

Part I

Part II

Part III

Thursday, 12 March 2009

Full-time Jobs Getting Harder To Find For Aussies

Australian employment rose by a tepid 1,200 jobs in February but as always a grain of salt needs to be taken with these numbers in light of the sampling error that states the real number could lie with 60,000 either side of the actual number reported. of the actual number reported.

However the real story is the growing divergence between full-time and part-time employment. full-time employment decreased by -53,800 the biggest decline since November 1991, whilst part-time employment increased by 55,600.

Year over year full-time employment is now down -0.5% whilst part-time employment is up 3.6%. The chart above shows that in previous recessions and downturns there is a wide divergence between full and part time employment. This is obviously not a good trend if full-time jobs are being replaced by part-time jobs.

The unemployment rose to a 3 year high of 5.2% largely due to some 48,000 new entrants entering the workforce although it needs to be remembered the Australian economy needs to create 15 - 20k jobs per month just to keep up with the growth in the labour force and prevent the unemployment rate from rising.

Large drops in full-time employment is obviously not a good sign and serves to reinforce the more leading indicators of employment from the ANZ job ad series and the DEEWR Monthly Leading Indicator of Employment as well as the AIG industry surveys that have shown employment contracting for months.

From the abs data, the number of people employed in the Australian economy peaked in October, that is probably as good a time as any to date the start of the current recession from. The Australian unemployment rate looks set to blow through 7% by the end of the year and punch through 8% sometime in 2010. Where it peaks depends a lot on policy responses by governments both overseas and domestically.

However that is not to suggest that the government can prevent unemployment from rising significantly with any old fiscal response, such as throwing money at people so they can go a buy a flat screen TV for their 2nd bathroom.

Jim Cramer vs Jon Stewart Continues

NBC are pulling out all the stops having Jim Cramer go on 2 shows on the NBC network to help salvage his reputation. Anyone with a brain can see through the pathetic PR exercise. NBC doesn't seem to realize that the more they go on about it the worse they make it.

On the Daily Show on Tuesday, Jon Stewart pointed out how ridiculous the shills at NBC and Cramer look. The thing I took away from the clip was the look on Cramer's face, the guy is obviously really suffering, and I don't feel one ounce of sympathy for the fraud.

Here is Cramer's denfense, absolutely pathetic the guy is a complete charlatan,and the dozy bitch that often appears with him on CNBC Erin Burnett is not much better.

Tuesday, 10 March 2009

John Stewart Exposes The Charlatan Jim Cramer

Hat tip to Deano for spotting the latest skewering of CNBC and more specifically Jim Cramer on The Daily Show. After the great job they did on CNBC just a few days ago, Jim Cramer tried to defend himself in an article on Read Cramer Takes on the White House, Frank Rich and Jon Stewart.

However Cramer would have been better off shutting his mouth and taking his medicine as The Daily Show absolutely tore him a new arsehole in their latest segment and showed him up as the true charlatan that he is. Once thanks again to Deano for the links and the heads up.

ANZ Job Ads Show Biggest Monthly Decline Ever

Last month I noted that the increase in newspaper ads in December should be viewed with caution. That turned out to be on the money as newspaper ads fell -25.2% in February, wiping out all the gains in January and then some and are now down -55.4% from a year ago.

Internet ads which make up for 95% of all job ads fell -9.4% in February and are now -38.6% lower than they were a year ago. The combined total of ads from both internet and newspapers fell -10.4% in February, the biggest single monthly drop since the combined series began in 1999. Also the year over year decline of -39.8% is also the largest since the series began.

ANZ's Head of Australian Economics, Warren Hogan, had this to say:

The trends in job advertising in Australia suggest a substantial rise in the unemployment rate is likely. We have revised up our unemployment rate forecasts. We now expect the unemployment rate to reach 6½% by the end of 2009 and 7½% by mid 2010. These job advertisement numbers, based on historical relationships, suggests the risks to our forecasts are for higher unemployment.....

...Our assessment is that the latest job ad results are consistent with employment contracting at a 2% annualised pace over the second half of 2009. This in turn suggests that the current downturn in the economy is likely to last throughout 2009, with little prospect of a meaningful recovery before 2010. Recent trends in job advertising are consistent with other indicators which suggest that the Australian economy entered recession in late 2008 and remains in recession in early 2009.

Well fancy that, a mainstream economist is now playing catch-up with a deteriorating economic picture. Welcome to the recession camp Warren, you may be late but you won't be the last. Note that Hogan say risks to his unemployment forecasts are to the upside. I concur.

Also out today, NAB's monthly survey of business conditions which fell to -20, a reading not seen since 1992. NAB Chief Economist Alan Oster had this to say, from The Australian:

"There is little in the survey to suggest that activity levels might be bottoming with continuing falls in mining and manufacturing activity very prominent,"

"Nor is there much solace to be found in the employment, forward order and capex data in the survey."

The bank has lifted it forecast for the nation's jobless and now sees it at 6.5 per cent by the end of 2009 and 7.5 per cent in 2010

The NAB survey showed the employment index fell by 10 index points to minus 27 points in February, the largest fall in the survey's history to level last touched in December 1991.....

...."Our forecasts imply a moderate recession in 2009 - it would no longer be appropriate to classify these forecasts as a mild recession," he said.

NAB expects the Reserve Bank to cut the cash rate to 2 per cent by late 2009, from 3.25 per cent currently.

Seems Allan Oster and Warren Hogan are now smoking from the same hookah pipe (click the link if you don't know what a hookah pipe is). Yes I know, what use are economists in telling you what you already knew 3 months ago ? None, charlatans the lot of em.

The thing to note is that their forecasts continue to get worse, just 3 months ago, most thought we could scrape through and avoid a recession. a month ago it was maybe a mild recession and now its a moderate recession. Give them a few more months and it will be a severe recession with unemployment forecasts over 8% in 2010. But since you know that already, it won't be a surprise when the media excitedly announce it.

Monday, 9 March 2009

Geithner Gone By June?

Chris Whalen of Institutional Risk Analytics says that Tim Geithner will be gone by June. Also in this brief piece, he says Citigroup will be resolved by some kind of liquidation process, about time. Let's hope he's right on both scores but I have a feeling we may be disappointed.

Sunday, 8 March 2009

February Another Horrible Month for US Jobs

US non-farm payrolls shed 651k jobs in February. However, as usual the more interesting numbers are the revisiosn and they shoeed a continuation of an already bad trend. The trend in recent months is for revisions to be on the downside and this month was no exception.

December payrolls were revised from a loss of -577k to a loss of -681k whilst January was revised from a loss of -598k to a loss of -655k. Job losses are clearly worse than the headline number indicate. Revisions to January (each month undergoes two revisions) and February could easily push losses for those months in excess of 700k.

In the past 4 months, 2.6 million jobs have been lost, the most in any 4 month period since the 4 months from June to September 1945 when 2.8 million jobs were lost.

Of course that needs to be put into perspective. 2.8 million jobs in 1945 amounted to a massive 6.8% of the labor force whereas the current 4 month contraction amounts to 1.9%. That is not meant to minimize the current situation, the US economy is shedding jobs at an alarming rate.

The US unemployment rate leapt to 8.1% in February, surpassing the peak of the early 90's recession and reaching heights not seen since December 1983. If you include people who currently want a job but are not actively looking and those working part-time but that would like to work full-time, the unemplyment rate is 14.8%.

The US employment picture gets more grim with each passing month. Job losses are intensifying although an absolute peak in monthly declines may not be too far off. At current rates it is clear that the US unemployment rate is set to push through 9% by the summer and looks likely to hit double digits by the end of the year or early in 2010.

However, as employment is a lagging indicator of interest will be when the monthly declines peak and start getting smaller, that still appears to be a few months away and wll only be obvious after revisions come through to prior months.

Saturday, 7 March 2009

The Daily Show Rips CNBC Apart

Absolutely one of the best clips I've seen in a long time. A host of CNBC muppets really get their commuppance on this clip although you'd need a movie length version to do it justice

Friday, 6 March 2009

Jim Chanos on Incompetence and Criminality

Always worth listening to, Jim Chanos on the distinction between incompetence and criminality. Basically Chanos says we should expect to see Enron style investigations into some of the wildly misleading statements by bank executives over the last couple of years. Chanos reveals how some institutions were pricing securities using two sets of books to make their financial position look better as just one example.

Wednesday, 4 March 2009

Australian Economy Contracts -0.5% in 4Q08

Back in December in The Recession We Couldn't Avoid, I wrote the following:

"There is no doubt in my mind that the Australian economy is now in recession."

The evidence back then showed that the manufacturing, services and construction sectors had all been contracting for at least 6 straight months each and that surveys of business conditions confidence were at recessionary levels. Today we got more confirmation that a recession has been underway for a least a quarter with the latest GDP numbers.

After tepid GDP growth of just 0.1% in 3Q08, Australian GDP contracted for the first time in 8 years falling -0.5% in the fourth quarter. This would seem at odds with what the RBA announced just yesterday after their decision to leave interest rates unchanged at their March meeting:

"on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere".

True, Australia hasn't seen declines as big as Japan or the US, but the fact is demand is undergoing a significant contraction in the non-farm sector. Excluding the farm sector, GDP was down -0.8% in the fourth quarter.

Also of interest in the above quote is the phrase "currently available data", as noted yesterday, the RBA is a data dependent and therefore a backward looking gauge of the economy. Remember that less than a year ago, the RBA was still waffling on about the threat of inflation and last March actually raised interest rates.

The RBA's ability to forecast the future is no better than anyone else's and so whilst they may be able to formulate a coherent narrative of where we have been, their forecasts for the future should be taken with a large grain of salt.

Year over Year GDP growth rose a paltry 0.3% in 4Q08 the slowest pace since the -0.9% recorded in the 12 months to December 1991, not surprisingly occurring just after the end of the last recession.

Despite the Rudd Stimulus package in December and consecutive interest rate cuts the Australian economy has been unable to avoid a contraction in the fourth quarter of 2008. Whilst Rudd Stimulus mark II will get underway in March and April it is unlikely that these measures can do more than soften the decline in economic activity in 2009.

Tuesday, 3 March 2009

RBA Keeps Rates Unchanged

The RBA decided to leave the cash rate unchanged at 3.25% at their board meeting today. From the statement by RBA Governor Glenn Stevens it seems clear that the RBA wants to sit back and evaluate the effect of the interest rate cuts and fiscal policy to date.

As usual, the RBA is behind the eight ball. The Rudd Government throwing money at people so they can buy houses and other stuff they can't afford and the RBA cutting interest rates when monetary policy is all but impotent, is not a recipe for an economic recovery.

As the global and therefore Australian economy continues to deteriorate into 2009, the RBA's hand will be forced into cutting interest rates again. To be clear, I'm not arguing that the RBA should have cut rates. I beleive, as was borne out in the US recently, that interest rate cuts do very little in a deflationary debt unwind.

It's quite possible that the Australian economy could sail through to the middle of the year on the back of Rudd Stimulus mark II in relatively good shape. January's retail sales numbers out today were no doubt buoyed by Rudd Stimulus no. 1.

However, once it becomes clear that the second half of 2009 is going to be worse than the first half, (I think it's already clear but the RBA will wait for the data to tell them it is) the RBA will be cutting rates again.

Sunday, 1 March 2009

XAO Makes it 6 in a Row in February

The All Ordinaries fell -5.2 in February after a -5.0% fall in January. That makes the sixth consecutive month decline in the XAO which is the first time that has happened in the last 25 years. The XAO has shed -9.9% for the year so far which, from the glass half full perspective, is slightly better than 2008 when the XAO shed -11.6% in the first 2 months of the year.

Once again a new closing low was made in February (although the intraday low was not breached). However, those new lows remain only slightly below the lows of November last year. It is still my belief that we will close significantly lower than the current closing low of 3281.5 at some stage this year, more than likely below 3000.

As mentioned many times before, a common feature of bear markets is a series of short sharp rallies that fail and ultimately end in lower lows. As shown by the shaded area on the chart above, a rally of the short sharp kind has been noticeably absent since the market rallied about 14.5% in the space of 7 trading days from the November intraday low.

There has been a lot of talk about the market being oversold and that we are therefore due for a rally. I tend to agree, however remember last year that there was a lot of talk about needing a final cathartic sell-off to make a bottom, we got the sell-off in November, but not the bottom. Stock market lore is full of such platitudes just waiting to be debunked.

The point is, just because we are due for a rally does not necessarily mean we will get one. That said I believe we will finish higher in March. Whilst the fundamental picture for the global economy and corporate earnings continues to deteriorate, I believe some type of rally is in order. As usual though my predictions should be taken with a grain of salt....and don't forget to vote in this months poll.